Do Higher Rates Cause Inflation? … And Does It Really Matter?

STAFF NEWS & ANALYSIS

Do Higher Rates Cause Inflation? … And Does It Really Matter?

By Daily Bell Staff – September 22, 2016

Monetarists Are Out of Ideas … Steve Williamson of the Federal Reserve Bank of St. Louis for the past three years or so has been trying to convince the macroeconomics world to consider a bold new theory — that central bank policy works in reverse, and that low interest rates cause low inflation. This is an idea sometime referred to as Neo-Fisherism. -Bloomberg

This article examines the theory that over time higher interest rates generate higher inflation. The idea here is that central banks need inflation to operate monetary policy appropriately.

This concept is a direct attack on Austrian, free-market economics. Current Austrian theory holds that money is a commodity like any other. Low interest rates basically cause more “money” – currency – to be

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